Cash In on ACE Cash?

There's nothing like a euphemism to put a friendly face on a distasteful service. ACE Cash Express (Nasdaq: AACE  ) likes to describe its business as "serving unbanked and underbanked consumers, many of whom seek alternatives to traditional banking relationships in order to gain convenient and immediate access to check cashing services and short-term consumer loans." This is really just a nice way of saying, "We're profiting from people with awful credit, or who have no access to a real bank."

For investors who don't have a problem with the moral issues surrounding the company, ACE Cash might be worth a look, but proceed with caution. On the surface, its fiscal second quarter seemed good. Earnings per share rose 24%. Gross margins improved from 32.7% to 34.4%. Loan fees and bill payment revenue popped 20% and 19%, respectively. At first glance, you might think the company a bargain as it trades for only 16 times earnings.

But there are a few red flags, and I think they're why the market isn't rewarding the company with a higher stock price. Total revenues rose 9%. Comparable-store sales rose only 4.8%. That may not sound bad if you're a retail business. But for this kind of business, in an industry that's probably in the early to middle stages of growth, one hopes for total revenues and comp increases to be in the double digits. But the real killer? The number of diluted shares outstanding increased by almost 30%. Management needs to get its act together, because that kind of dilution is sucking the life force out of its own business.

When I wrote aboutFirst Cash Financial Services (Nasdaq: FCFS  ) , I pointed out that ACE Cash has a major liability holding it back -- it isn't diversified enough. When you compare it with First Cash's latest quarter, you see why it's nice to have another revenue stream, particularly if any legislation is passed limiting the service fees or interest rates these kinds of lenders can charge. If that happens, ACE Cash will need a few loans of its own.

ACE Cash may not want to be in the pawn shop business, but if it wants to compete in the stock market, it had better find a way to achieve the same kind of growth that First Cash is seeing. For now, investors may want to consider cashing out of ACE Cash and making a dash to stash their hard-earned cash in an investment that may not crash. At least not quite so easily.

• The Myth of Socially Responsible Investing
• The Vig Is Up for First Cash
• Spitzer Helps Loan Sharks
• Cash America's Pawnshop Swap

Fool contributor Lawrence Meyers owns shares in First Cash, but you should do your own due diligence. This article reflects his opinion and is definitely not a recommendation to buy or sell any stock or to pawn any personal belongings. The Fool has a disclosure policy.